Eye on the News

Steven Malanga

Eleven Myths About Gotham's Budget

The belief that you need tax hikes to solve New Yorks fiscal woes rests on confusion over why the citys budget is so out of whack.

November 11, 2002

With his latest proposals to raise property taxes by as much as $2 billion, Mayor Bloomberg seems set on trying to fix the citys fiscal problems on taxpayers backs. Unfortunately, this is a familiar strategy in New York, where politicians look to tax increases to solve their budget problems far more often than is true in other localesin part because those who control the debate in the city have perpetuated deep confusions about the municipal budget and have advanced crafty justifications for higher taxes. Here are 11 of the biggest myths, misconceptions, and rationalizations making the rounds now.

1. The citys tax revenues are falling. In fact, its projected that revenues from city taxes and fees will rise next yearby about $2 billion, in some estimates. The projected deficit for next year is so large because the citys expenses are increasing faster than tax collections. Even in the current fiscal year, tax revenues arent falling; theyre simply not coming in at the anticipated rate. Only in 2001 did tax revenues actually decline sharply, a result of the nearly complete shutdown in economic activity on and immediately after September 11.

2. Residential property owners can afford a tax hike because their tax rates are low compared with the suburbs. Those who make this argument brush over the citys personal income tax, something that the suburbs dont impose. Add that income tax together with the citys property taxes, and New York City homeowners pay about the same in local taxes as many homeowners living in the close-in, middle-income suburbs. Moreover, while homeowners in more luxurious suburbs do pay much more in overall taxes, they get something New Yorkers dont get for that money: good schools. In fact, the lack of good schools, combined with the citys high tax rate, is a big reason New York has a net outflow of families with young children. For such families, the city is a lousy deal, and raising property taxes will just make it lousier still.

3. Raising taxes will add billions to the city treasury but only cost average New Yorkers a few dollars a day. This is what I call the gradualist argumentalways seeking to break down every tax increase by the week, day, or hour to make it appear as small as possible. But because taxes almost always increase during bad times and rarely decline afterward, the cumulative effect is staggering. Over the last ten years, the city has collected $250 billion in taxes and fees; if New York had merely taxed its citizens at the average of other big cities like Los Angeles and Chicago, it would have collected about $145 billion during the same period. Thats what the gradualism argument eventually gets you: $105 billion more siphoned out of the private economy over the course of a decade.

4. Still, the only fair way to deal with the citys budget deficit is to share the pain among all parties. This argument ignores a crucial fact: in New York, those who pay taxes always bear most of the pain, in good times and bad. The city taxes its residents and businesses at a rate about 75 percent higher than do other big American cities, while the citys municipal workforce is among the largest in the country, and many of its work rules and health and pension benefits among the most lavish. City government should be the servant of the people; in Gotham, however, political leaders often seem to think that private taxpayers exist solely to fund government.

5. Shrinking the citys workforce is a bad idea because the city is already in a recession. Some advocates for big government argue that municipal spending can boost a struggling economy. But government doesnt generate wealth or capital, and the money to finance municipal jobs comes out of the private economy. Taking more money out of a shrinking economy via higher taxes is only going to prompt more private sector losses.

6. If taxes arent increased, basic services will suffer. Next year, the city will collect about $30 billion in taxes and fees, a whopping $3,750 per resident. If the city cant provide basic services for that astounding sum, it tells you that theres something wrong with New Yorks spending priorities. If you were to give $3,750 per resident to virtually any other city in America to replace its own tax collections, that city would enjoy a huge budget surplus.

7. The citys schools are so seriously underfunded they cannot possibly share in the budget pain. Actually, thanks to big increases in school funding during the Giuliani years, the schools now receive about $12,500 per student, making them fifth in spending per pupil among the 100 largest school districts in America. City schools now spend more than do many suburban districts praised for their generous school budgets.

8. The citys total budget may be $42 billion, but the mayor only has $15 billion in discretionary spending that he can cut. First, keep in mind that $15 billion is bigger than the entire budgets of most American cities. More to the point, the mayor enjoys so little wiggle room on the budget because he has refused until now to reduce the citys workforce. Without paring jobs significantly, the mayor wont be able to bring spending under control, because union contracts lock in automatic increases in salaries and benefits to those on the payroll.

9. Other cities are having financial troubles, too, because of the bad economy. Because other cities spend so much less than New York and have such smaller budgets, theyre simply not as financially vulnerable as Gotham. The combined budget deficit for Chicago, including its school system and the Cook County government that shares services with the city, for example, is only about $300 millionless than one-tenth New Yorks projected deficit.

10. Albany is part of the problem; it forces too many costs on the city. Its misleading to see many state-mandated costs as Albany-imposed burdens. After all, nearly half the legislators in Albany hail from New York City, and they often lead the efforts to expand spending on Medicaid or pension benefits that drive the citys costs so high. When former Mayor Giuliani faced his budget deficits, he made it clear that if Gothams state legislators didnt cooperate to solve the citys budget crisis, hed make deep cuts in the municipal workforce, and blame the legislators. By contrast, Bloomberg got almost no help from these city-based pols in his first budget, and for good reason: He hasnt even begun to play hardball with them.

11. The city doesnt get its fair share from Washington. Studies of what New Yorkers pay in federal taxes compared with what the city and state get back in federal funds always purport to show a deficit of federal spending locally. But a close look at the studies shows that the shortfall is almost entirely a function of low defense spending in the city (no surprise, given that New Yorks congressional delegation includes few hawks lobbying for fatter defense budgets). In other spending areas, especially those where the city wants more help from the federal governmentabove all, Medicaid and programs such as subsidized housing and welfareNew York already brings in far more federal aid per capita than most other American cities. In other words, dont blame Washington.